This morning, the Senate rejected a bill that would have extended the Bush-era income tax cuts. We don’t know how this issue will resolve itself, but tucked into the bill was a provision that will have a profound effect on estate tax law. What is worse, it may make your living trust obsolete at best, and dangerous at worst. We think this estate tax provision is likely to find its way into any bill that eventually passes, because both the President and the Republicans favor it.

Here’s what this new provision does:

It fixes the exclusion from estate taxes at $3,500,000. If you have an estate that is under $3,500,000, you pay no estate taxes.

A husband and wife can shield up to $7 million from estate taxes.

Up to now, a married couple needed an “A-B” type living trust in order to double up on the estate tax exclusion. If and when the new law passes, you won’t need an A-B trust, or any trust, to double up on the exclusions; the $7 million exclusion for a married couple will be automatic.

But all this doesn’t just make your living trust superfluous. In order to double up on the exclusion, the living trust includes a number of tax and non-tax provisions that people will now find that they don’t want, or that will harm them. If both spouses are still alive, once the law passes, they must examine their living trust to determine if they wish to amend it.